Kulicke & Soffa Industries, Inc. — FY2019 Form 10-K Summary
Reporting period: The filing is an annual report for the fiscal year ended September 28, 2019, not a standalone 2018 fourth-quarter filing. Fiscal 2018 ended September 29, 2018. K&S designs, manufactures and services semiconductor assembly equipment, tools and electronic assembly solutions. Its reportable segments are Capital Equipment and Aftermarket Products and Services (APS).
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net revenue | $540.1 million | $889.1 million | Down 39.3% |
| Gross profit | $254.6 million | $409.4 million | Down 37.8% |
| Gross margin | 47.1% | 46.1% | Up 100 bps |
| Income from operations | $21.6 million | $166.6 million | Down 87.0% |
| Operating margin | 4.0% | 18.7% | Down approximately 1,470 bps |
| Net income | $11.7 million | $56.7 million | Down 79.4% |
| Diluted EPS | $0.18 | $0.80 | Down $0.62 |
| Operating cash flow | $66.0 million | $123.5 million | Down 46.6% |
Capital Equipment revenue declined 46.2% to $386.8 million, while APS revenue declined 9.7% to $153.2 million. Capital Equipment represented 71.6% of total revenue and APS represented 28.4%.
Capital Equipment operating income declined from $132.6 million to a loss of $12.6 million. APS operating income was relatively stable at $34.2 million versus $34.1 million. Lower volume, unfavorable pricing, product mix and competition drove the decline, while lower operating expenses partly offset the impact.
SG&A declined 5.2% to $116.8 million and research and development declined 2.9% to $116.2 million. As a percentage of revenue, however, total operating expenses increased to 43.1% from 27.4% because of the revenue contraction.
Interest income increased to $15.1 million from $12.0 million, while interest expense increased to $2.1 million from $1.1 million. The effective tax rate was 66.0%, compared with 68.0% in FY2018. FY2019 tax expense included $9.4 million related to additional guidance and regulations concerning the U.S. one-time transition tax under the Tax Cuts and Jobs Act.
Cash, cash equivalents, restricted cash and short-term investments totaled $593.2 million at year-end, including $364.2 million of cash and cash equivalents and $229.0 million of short-term investments. The company reported working capital of $719.1 million and shareholders’ equity of $769.1 million.
Total debt and financing obligations were approximately $75.1 million, consisting primarily of $60.9 million drawn under an unsecured $150.0 million overdraft facility and a $14.2 million financing obligation related to the Singapore headquarters. The overdraft bears interest at overnight U.S. dollar LIBOR plus 1.5% and is payable upon 30 days’ written demand.
Investing activities provided $47.5 million, primarily reflecting net maturities of short-term investments. Financing activities used $71.3 million, including $99.9 million for share repurchases and $31.6 million of dividends, partially offset by overdraft borrowings. Capital expenditures were $11.7 million.
Material changes versus the prior comparable period
- Revenue and bookings fell sharply as semiconductor customers reduced capital investment amid weaker semiconductor, LED, memory and automotive demand. Bookings declined to $503.1 million from $840.1 million.
- Year-end backlog declined to $104.7 million from $141.7 million; most orders may be canceled or deferred with limited penalties.
- Gross margin improved despite lower revenue, primarily because of product mix and lower costs, but operating leverage caused operating margin and net income to fall substantially.
- Demand weakness began in the fourth quarter of FY2018 and management expected soft demand to continue through FY2020.
- The company repurchased 4.7 million shares for $100.5 million during FY2019 and had approximately $97.1 million of remaining authorization at year-end.
- Quarterly performance was volatile: FY2019 included a second-quarter operating loss of $2.5 million and net loss of $3.6 million, followed by improved profitability in the third and fourth quarters.
- Management reported no goodwill impairment in FY2019 and no triggering event requiring long-lived-asset impairment testing.
Outlook, risks and unusual items
Management expects long-term semiconductor consumption growth but has limited visibility into near-term demand. The company expected FY2020 capital expenditures of $18.0 million to $22.0 million and believed existing cash, investments and operating cash flow would meet liquidity needs for at least the next twelve months.
Management is pursuing technology and market diversification, including advanced packaging, miniLED placement, memory assembly, power electronics, automotive and other niche applications. Fiscal 2019 included the launch of PIXALUX, a miniLED die-placement product.
- Major risks include semiconductor cyclicality, customer order cancellations or deferrals, pricing pressure, inventory obsolescence, competition and rapid technology changes.
- Approximately 93.3% of FY2019 revenue was attributable to shipments outside the United States, and approximately 46.7% was attributable to customers in China. U.S.-China trade tensions and tariffs were identified as contributors to demand uncertainty.
- The ten largest customers accounted for 53.8% of FY2019 revenue, although no individual customer exceeded 10% of revenue. Several distributors represented significant portions of accounts receivable.
- The Singapore tax incentive, which reduced FY2019 income tax expense by approximately $5.0 million, was scheduled to expire in FY2020 and renewal was uncertain. Without the incentive, the applicable Singapore tax rate would otherwise be 17%.
- Contractual commitments included $83.3 million of inventory purchase obligations, $16.3 million of operating lease obligations and $72.4 million of U.S. transition-tax payments.
- The company previously restated certain historical financial statements following an unauthorized transaction by a senior finance employee. Management and the auditor concluded that internal control over financial reporting was effective as of September 28, 2019, but related legal, regulatory and reputational risks remain relevant.
- Other risks include foreign-exchange exposure, supplier concentration, cybersecurity, environmental compliance, tax examinations, unrecognized tax benefits and the potential transition away from LIBOR.
Investor verification checklist
- Verify the filing period: FY2019 ended September 28, 2019; the source does not present a separate “2018 Q4” filing.
- Reconcile the sharp revenue decline with customer bookings, backlog, segment volume, pricing and product-mix disclosures.
- Review the sustainability of the 47.1% gross margin and the effect of continued low Capital Equipment utilization on FY2020 profitability.
- Assess liquidity after share repurchases, dividends, the $60.9 million overdraft balance and contractual commitments.
- Monitor renewal of the Singapore tax incentive and the resulting potential increase in the effective tax rate.
- Evaluate exposure to China, tariffs, customer concentration, distributor receivables and semiconductor capital-spending cycles.
- Review the consequences of the prior restatement and unauthorized transaction, including any pending litigation, regulatory matters or additional costs.